SECURE Waste Infrastructure Corp. (SES) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Secure Energy Q3 2022 Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, November 2, 2022. I would now like to turn the conference over to Anil Aggarwala, VP, Treasury and IR. Please go ahead.

Thank you, Michelle. Welcome to Secure Energy's conference call for the third quarter of 2022. Joining me on the call today is Rene Amirault, our Chief Executive Officer; Allen Gransch, our newly appointed President; and Chad Magus, our Chief Financial Officer. During the call today, we will make forward-looking statements related to future performance, and we will refer to certain financial measures and ratios that do not have any standardized meaning prescribed by GAAP and may not be comparable to similar financial measures or ratios disclosed by other companies. The forward-looking statements reflect the current views of Secure with respect to future events and are based on certain key expectations and assumptions considered reasonable by Secure. Since forward-looking information address future events and conditions, by their very nature, they involve inherent assumptions, risks and uncertainties, and actual results could differ materially from those anticipated due to numerous factors and risks. Please refer to our continuous disclosure documents available on SEDAR as they identify risk factors applicable to Secure, factors which may cause actual results to differ materially from any forward-looking statements, and identify and define our non-GAAP measures. I will now turn the call over to Rene for his opening remarks.

Thank you, Anil, and good morning, everyone. To open today, I'd like to congratulate Allen Gransch on his appointment to President and Corey Higham as our new Chief Operating Officer. Both individuals have been with Secure since it was founded in 2007 and are a critical part of our leadership and entrepreneurial culture. They are a big part of why we are leaders in this industry. Today, we will review our financial and operational results for Q3 2022, followed by our outlook for the remainder of the year. Our third quarter was another historic quarter for Secure. We generated record adjusted EBITDA of $154 million, achieved our $75 million synergy target ahead of schedule and improved our debt to EBITDA ratio to 2.2x. With the success in the business and the stronger balance sheet, we're excited to announce our capital allocation priorities that will result in significantly higher shareholder returns while continuing to prioritize a strong balance sheet. Effective with our next dividend payment in January, our quarterly dividend will jump from $0.03 and per share to $0.40 annually. This is a substantial increase from our current annual dividend. This new dividend amount is sustainable, backed by contracted and reoccurring cash flows and can grow over time. In addition, we plan to begin a share repurchase program in early 2023. We will be opportunistic with our buyback program, which should result in additional shareholder returns. In terms of our Q3 performance, we continue to be extremely pleased with the progress and integration of the Tervita acquisition. At the end of Q3, we achieved $76 million of annualized run rate cost savings that impact adjusted EBITDA, exceeding our target of $75 million. We have achieved additional savings from refinements in our capital structure by repurchasing outstanding 11% senior secured notes. There are additional opportunities to optimize our facility network and make operational improvements, however, we don't intend to continue reporting these synergies going forward. The macro environment for the oil and gas industry remains strong, and we see that continuing, even if the economy slows down in the near future as the fundamental need for oil and gas should continue to be supportive. This is leading to strong demand for our infrastructure across all our business lines. In Q3, we generated adjusted EBITDA of $154 million, a 47% increase from Q3 2021, which was our first full quarter following the Tervita transaction and another record quarter for Secure. This allowed us to reduce our leverage ratio from 2.5x to 2.2x. We remain focused on deleveraging and currently have a debt principal balance of $1 billion versus our target of $850 million to $950 million. In addition to our financial and operational strengths, our commitment to ESG remains an important part of our business. We are on track to exceed our target of 5% freshwater usage reduction having reached 7.6% in the first half of the year. Chad will now walk us through the key financial highlights of our Q3 results. Then Allen will review our operational highlights and integration update. And I will go over more details on our capital allocation and outlook for the remainder of the year and 2023.

Thanks, Rene, and good morning to everyone on the call. Our third quarter results continued to demonstrate the enhanced scale of our business, our ongoing focus on managing costs and reducing debt, and an overall improvement in the underlying markets. It's important to note that this is the first quarter where the comparative data includes the Tervita business as the transaction closed July 2, 2021. We recorded net income of $60 million, or $0.19 per share, an increase of $82 million, or $0.26 per share, for the third quarter -- from the third quarter of 2021. Funds flow from operations increased 78% to $132 million, a 79% increase on a per share basis to $0.43 per basic share. Our adjusted EBITDA of $154 million increased 47%, or $49 million from $105 million a year earlier, and on a per basic share basis was $0.50, also a 47% increase from the prior year. Realized synergies contributed $11 million of incremental EBITDA compared to the third quarter of 2021. The remainder of the increase is primarily due to higher industry activity levels, which led to higher processing and disposal volumes at our midstream infrastructure processing facilities, including a 7% increase in water disposal volumes and at our industrial landfills, which saw volumes increase 22%. Our adjusted EBITDA margin of 37% increased from 33% in the third quarter of 2021 due to the positive impact from the cost synergies and increased industry activity levels. Inflation has had an impact on our costs, but we have been able to effectively manage this and offset through operational synergies, efficiencies and price increases. As well, our G&A as a percentage of revenue, excluding oil purchase and resale, also improved to 7% compared to 9% in the third quarter of 2021. In Midstream Infrastructure, our third quarter segment profit increased to $117 million, 38% higher than $85 million recorded in Q3 2021. This is largely due to higher water disposal, processing, crude oil terminaling and pipeline volumes from higher oilfield activity and production. Higher crude oil pricing in the third quarter also positively impacted recovered oil revenue, and along with increased marketing volumes, helped increase oil purchase and resale revenue by 85% to $1.7 billion. In Environmental and Fluid Management, third quarter segment profit jumped 39% from $49 million to $68 million. This strong performance was largely due to higher revenues across our business units, including from landfills, waste services and drilling and production services. Our metals recycling business saw increased volume throughput, and prices remained relatively strong in the quarter. Our positive operating results and capital spending that was in line with our expectations allowed Secure to generate $108 million of discretionary free cash flow in the third quarter, an increase of 42% compared to the prior year or 40% on a per share basis. All that was used mainly for debt repayment. We continue to remain focused on a strong balance sheet as we target a lower debt balance than where we ended the quarter. With respect to our balance sheet, our capital structure consists of no near-term maturities with the first fixed note maturing in 2025. We retain a strong liquidity position of approximately $381 million of availability on our credit facilities, which also mature in 2025. In the third quarter, we renewed our $800 million revolving credit facility at more favorable terms than our previous facility. We were able to negotiate lower interest pricing margins and additional financial flexibility to allow us to continue to refine our capital structure. We continue to buy our 11% senior secured notes through open market repurchases. In the third quarter, we repurchased just USD 3 million of notes, but in October, we have repurchased an additional USD 46 million. As of today, we have USD 174 million of senior secured notes outstanding, down 65% from USD 500 million in July of last year when the transaction was closed. We estimate this will save us approximately $20 million annually in interest charges. As a result of our focus on debt repayment and positive operational results, we significantly enhanced our overall debt metrics. Our total debt to EBITDA ratio improved to 2.2x, down from 2.5x at the beginning of the quarter and significant progress from 3.5x at the end of the third quarter of 2021. Overall, we're extremely pleased with our balance sheet management since the completion of the merger. And now that our initial debt reduction targets have been met, we are able to increase our returns to shareholders. This was made possible due to our significant, reliable cash flow, providing the platform to support the dividend while also allowing us to continue to reduce outstanding debt. I will now pass the call over to Allen to provide operational updates.

Thanks, Chad. Good morning, everyone. Looking at our operational highlights, in the third quarter, we continued to see high activity levels at our facilities. The Midstream Infrastructure segment saw higher volume throughput as a result of increased production volume, drilling and completion activity. Water disposal volumes in the third quarter of 2022 compared to the same quarter of 2021 increased 7%, which follows the trend of our same-store sales we've seen over a number of years where water volumes continue to steadily increase 6% to 7% on an annual basis as production wells mature. Our facility network handled approximately 26,500 cubic meters on a daily basis, or about 167,000 barrels a day, in the third quarter of 2022. Our oil terminaling and pipeline volumes increased 26% from the prior year, which helped contribute to strong crude oil terminaling and marketing results. We handled approximately 16,200 cubic meters per day, or 102,000 barrels per day, in the third quarter of oil. Our waste processing volumes were also slightly higher in the quarter than last year due to higher activity levels. The third quarter volumes increase at our midstream processing facilities are a result of higher activity levels that require more treating, processing and disposal. Our facility utilization continues to trend upward and at the end of the quarter is approximately 65% to 70%. As we have noted in the past, we continue to have capacity to handle additional increases in volume without needing to invest significant additional capital. We continue to focus our growth capital on opportunities that involve partnerships with longer-term contracts, take-or-pay volume commitments. In the third quarter, our Midstream segment, we have continued to advance opportunities for 2 pipeline tie-ins to existing water infrastructure and a pipeline tie-in and terminaling infrastructure in the Clearwater region of north central Alberta, all backed by long-term arrangements. The significant growth in the Clearwater area over the past year has required additional infrastructure to support the growth in production. In our Environmental and Fluid Management business segment, we are also benefiting from higher commodity prices and increased activity levels. Landfill volumes were up 22% compared to Q3 2021. And as a result of increased activity levels and increased remediation work, it's a trend we expect to continue with the recent changes to the regulation surrounding asset retirement obligations. We expect increased abandonment, remediation and reclamation activity to positively impact our Canadian operations. Both the Alberta and Saskatchewan governments have introduced minimum spending requirement starting in 2023 with targeted spending levels that companies with retirement obligation liabilities must spend. The Alberta program requires a minimum $700 million spent in 2023 with yearly planned increases in the years to come. Secure is well positioned in the Environmental business segment to support this work, including adding additional landfill capacity that will likely see more volume as a result of this regulatory change. Our waste transfer sludge pad volumes have increased 59% compared to the same period of 2021 as all facilities have seen higher volumes. Activity in the lower mainland of British Columbia have increased to additional new customers, combined with volumes from construction of the Trans Mountain pipeline. Northern Alberta volumes have more than tripled due to NORM-contaminated sludge disposal material from producers in the region. Q3 activity had significant increases through a variety of cleanup jobs completed for customers, combining the expertise of our NORM treatment with an established facility in the Grande Prairie area have been a direct benefit of the merger. Our metal recycling facility continues to benefit from robust pricing as ferrous and non-ferrous pricing remains strong with help that's driven volumes in our facilities throughout the quarter. We took delivery of additional 25 railcars, along with more efficient operations, resulted in a 34% increase in ferrous volumes throughput and a 54% increase non-ferrous volume throughput. On to synergies. We are extremely proud of our team's hard work to achieve the synergies target of $75 million during the quarter. At September 30, we have generated $76 million in annual recurring synergies. This is despite Secure deferring some facility rationalizations originally forecast for this year, but being put on hold due to higher than expected activity levels. We are seeing the impact of synergies in our quarterly results as realized synergies have resulted in more efficient operations and lower overall cost and improving margins. In the Midstream Infrastructure segment, the third quarter margin was 65% compared to 64% last year, and the Environmental and Fluid Management segment saw a 3% increase to 29%. We continue to work on making our operations more efficient. And as a result of the integration, we are working on additional synergies that will, in total, exceed the $76 million realized to date. Additional savings through initiatives, such as improving our capital structure as well as minimizing sustaining capital by managing the underutilized assets, are expected to provide incremental discretionary free cash flow beyond our $75 million cost savings target. We are also progressing our short- and long-term ESG goals as ESG remains an important priority for our company. One of our short-term goals was to reduce freshwater usage by 5% in 2022. We are pleased to report that we have reduced usage by 7.6% in the first half of the year. In addition to the short- and long-term targets we have set, we are continually evaluating opportunities to participate in carbon capture infrastructure, and that evaluation will continue throughout the next few years. In Q3, we spent a total of $30 million of capital, which included $21 million of sustaining capital, primarily spent on well and facility maintenance, landfill cell expansion and asset integrity and inspection programs. Growth capital of $9 million related mainly to the pipeline tie-in of produced water infrastructure in the Grand Prairie area. I will now turn it back to Rene to address our outlook for the remainder of 2022 and 2023.

Thanks, Chad and Allen. The third quarter was another extremely successful quarter for Secure. We realized our synergy target following the merger with Tervita. We reduced our debt to EBITDA ratio to 2.2x as we continued to allocate most of our discretionary free cash flow to the balance sheet. We had record adjusted EBITDA as all segments of our business continue to see strong demand, and we are making good progress on our ESG goals. With our strong results to date, we're demonstrating that our enhanced scale better positions us to optimize existing assets in operations so we can add more value to our customers and provide greater optionality in allocating capital through all market environments. Our outlook for the remainder of the year and into 2023 is supportive continued strong energy industry activity. We do expect continued volatility in the benchmark crude oil and gas prices as a result of macroeconomic factors such as inflationary pressures, the prospect of a near-term recession, geopolitical risk premium due to the current war in Ukraine, all resulting in continuous changes to the supply and demand outlook. Having said that, we believe demand for hydrocarbons will remain strong and producer cash flows very robust. Business should benefit in 2023 from the following: full year realizations of our synergies; increased utilization of our midstream processing facilities, driven by higher drilling completion and production volumes requiring treating, processing, terminaling and disposal; increased volumes at our industrial landfill and waste facilities as industry activity and reclamation work both continue to trend higher. There is a clear direction from the Alberta energy regulator requiring minimum spend levels in 2023 and future years that must be used for reclamation activity. A similar program is expected to begin in Saskatchewan in 2023. These should positively impact all our operations, but particularly with our Environmental and Fluid Management segment as we expect higher demand for our services. And also reduce the interest costs as we continue to improve our capital structure. With strong momentum in our business and industry activity, we expect to see higher year-over-year adjusted EBITDA and discretionary free cash flow in 2023. Given this backdrop, we have made some significant updates to our capital allocation priorities in order to return more capital to shareholders while remaining focused on reducing our total debt. Our priority will remain on reducing our debt, along with a return of capital to our shareholders. We have set a debt target of $850 million to $950 million, which is below 2x EBITDA, and gives us sufficient financial flexibility to run our business and take advantage of opportunities. Beginning with the next dividend payment payable in Q1 2023, our quarterly dividend will increase to $0.10 per share for a yearly dividend of $0.40 per share. That compares to the $0.03 per share we are currently paying out. The $0.40 dividend translates to a total of approximately $125 million in 2023. That amount is sustainable and backed by contracting and reoccurring cash flows from our business lines. In the last 12 months, we have generated $321 million of discretionary free cash flow. This dividend represents approximately 40% from a payout perspective, providing us room to grow the dividend over time as our balance sheet strengthens and the business continues to grow. In addition to the dividend, we will look at buying back our shares on an opportunistic basis starting in 2023. This should result in additional returns to shareholders. We have established an initial capital plan for next year of $135 million, comprised of $50 million of growth capital, $60 million of sustaining capital and $25 million of additional sustaining capital related to landfill expansions. Growth capital will continue to be allocated to opportunities that leverage or build upon our existing infrastructure through long-term contracts backed by partnerships. Sustaining capital is based on current and future activity levels. We're excited by the future of Secure. We are in the process of digitizing a few of our processes that will reduce paper flow and allow for quicker payments. We remain focused on helping our customers develop the highest ESG standards and lowest cost structure in the world, ensuring we create sustainable energy and environmental solutions for many decades. If the last 6 months have taught us anything, it is that Canadian oil and gas industry should be celebrated. The high energy prices we have seen, partly as a result of the war in Ukraine, has caused the world to move backwards, not forwards, in terms of meeting our collective goal of reducing carbon emissions. Richer and poorer nations alike, not wanting their citizens to freeze, their industries to shut down, or for there to be food on the table are turning to higher carbon forms of energy such as coal that provide needed energy, but come with much higher emissions. Renewable energy has proven to be a good source of energy when the wind is blowing or the sun is shining, and technology will continue to progress renewables. But it cannot be relied on for baseload energy and is too far away to be a realistic replacement for fossil fuels anytime soon. Canadians have much to be thankful for, including our homegrown energy industry. Canada has the ability to provide cost effective and more reliable energy developed under the highest social and environmental standards in the world, providing security to other nations that are not as fortunate as we are. My hope is that governments of the world, in particular our own, come to the realization that the way to a sustainable lower carbon future is more Canadian energy; not less. With our efforts to date and the continuing hard work of our employees, we believe we are part of the long-term Canadian solution for the world. We are well positioned for the remainder of the year as we head into 2023. I want to thank all Secure employees that have continued to contribute to our and our customers' successes. I would also like to thank Joe Lenz from Angelo Gordon joining the Secure Board. We look forward to him adding value and great governance for many years to come. I would also like to thank our customers and stakeholders for their continued support and partnership. That concludes our prepared remarks. We would now be happy to take your questions.

[Operator Instructions] The first question comes from Cole Pereira of Stifel.

Just on the buyback front, can you give a sense of how material you think that might be this year, or is it just going to be very price dependent?

So as we mentioned, Cole, we'll probably kick that off in early 2023. And really what we want to do is, obviously, as we see our debt targets being hit, take advantage of where we think we're trading at, and currently obviously feel that we're very undervalued. So the magnitude of that is yet to be determined. But as you can see, with that excess free cash flow, we do have some tremendous amount of flexibility as to how large that might be. But we'll probably have -- you'll see us have a better sense going into Q1 as we report, and you'll see it obviously in terms of how much we're buying.

Okay. Great. And thinking about the dividend, it's obviously very attractive now. But how do you think about the policy longer term? I mean, is it going to be sort of an annual increase? Or do you maybe think about specials and balancing that with buybacks as well?

If you look at our stable cash flow, Allen has mentioned many a times about the contracted as well as the reoccurring cash flow. We just don't think the variable dividend has a place based on how we're able to generate free cash flow. So I think what you should expect from us is growing the base dividend over time. And certainly, we want it not only to grow, but be in a position where we're not worried about ever decreasing that dividend. It's really going to be a long-term sustainable dividend that grows over time.

Got it. And just quickly on the industrial services/industrial waste disposal business. I mean, it's a smaller piece, but it's a pretty high multiple business. How do you think about more material growth in that segment, whether organically or via M&A?

Cole, it's Allen here. Yes. No, great question. I think when you think about our assets, we have a sludge pad facility in Edmonton. We have another one in Richmond. We benefited from some of the TMX construction that happened throughout the year. You have LNG Canada occurring on the West Coast, and I think there's opportunities for us to work more closely with them. And so there are opportunities to permit more infrastructure and to grow, and we do like the margins. And we do like having this infrastructure tied to some industrial segments that provide that opportunity for future growth. So, pretty happy with the increase in volumes. Like our sludge pad volumes were up 59% this year -- or this quarter. So, very happy with how these facilities are performing, and they fit very well within our network.

The next question comes from Patrick Kenny of National Bank Financial.

Just maybe back to the inflationary cost pressures. If you could provide maybe an update on what increases you're able to flow through to customers today, what challenges you still see ahead in terms of having to absorb some of the pressures near term and how you're looking to mitigate those longer term?

Yes. Good question, Patrick. So in the third quarter, when you look at our midstream infrastructure, our margins were 65% compared to 64% in the prior period. And on our environmental and fluid management business, it was 29% versus 26%. So we're able to increase our margins, but part and parcel to that is our synergies. And obviously, with some of the synergy work that we've done in achieving our targets earlier than we had expected is obviously proving that to the bottom line and improving our margins. But we're very cognizant of cost. You look at the Canadian inflation numbers for Q3, and we're up on average around 7%. And we did flow through some pricing increases here in Q4 to match that inflationary increase that we are seeing. So we are trying to stay ahead of it. I would say in terms of supply constraints on our chemicals, the chemicals coming out of the Gulf, I think we're definitely starting to see less of a supply shortage and are able to get those chemicals at more of a regular cost, not an inflated cost. But we are stockpiling some chemicals overseas that we need for some of our blend plans, which are taking longer to get and have seen some inflationary pressures. But I'd say overall in the business, when you think about our main drivers, which is electricity, nat gas, fuel, we have been able to and have done a great job at maintaining those costs within our margins. But we will monitor that, and we will talk with our customers as they see it too on these increasing costs to flow through via pricing. But so far, I think we've done a great job managing it.

And just on labor shortages economy wide, maybe for Rene. You mentioned the need for more government support for industry in your prepared remarks. Wondering if you've had any discussions with Premier Smith or the new cabinet yet, or what your initial take might be on any new policies or support that might be on the horizon to help accelerate activity in the province even further into 2023.

We had some conversations back in the spring and the summer on some of this. And I think a big part of this is our industry getting creative in terms of whether our future workforce is going to come from Eastern Canada as I think we're going to -- certain parts of the country are going to slide into a recession. The federal government, which right now controls immigration and just announced that they want to bump up immigration over the next 3 years by 1.8 million. So I think it's going to be a combination of immigration and maybe things slowing down in Eastern Canada that's going to help that current gap from a workforce point of view. I mean, we're quite fortunate in that a lot of our facilities are not remote. We do -- obviously, we have some casual labor that do have to go into camps. But a lot of our workforce is salary. A lot of our workforce is able to go home at night and provide a steady shift, and that helps us attract here at Secure. But to your point, it's an industry issue; not so much what Secure's fortunate at. It is definitely an industry issue. And if you don't have the crews to run the drilling rigs and the frac crews, then ultimately, production would slow down. So we're kind of working it together as an industry. And I think the solution is going to be a combination of probably Canadians outside of Alberta and Saskatchewan and probably having a robust immigration policy from the federal government.

The next question comes from Aaron MacNeil of TD Securities.

Maybe I'll start with a bit of a different take on Cole's question. Just given the strength of the outlook and that most of the heavy lifting around Tervita is now behind you, is now the time to try to revisit the sale of secondary business lines? And especially those related to Tervita, are there any that you view as non-core? Or now that you've sort of focused on shareholder returns, are all of these segments now critical to your kind of shareholder return strategy or capital allocation priorities?

Yes. One of the things that we've done as a management team and a board is trying to look out 5 years. So we do have a 5-year strategy. And one of the things that you always look at no matter how much you love the business is what's creating the highest return to the shareholders. And as we've gone through that process and are continuing to go through that process, there will be core and non-core business units that will change over time. But I mean, what I do love about the businesses that we have today is the high amount of free cash flow that they're able to contribute to our bottom line. That obviously fuels the dividend and the buybacks and the debt repayment and ultimately shareholder value. So we don't really have any deadlines to say we have to do something by such and such date so much as if other industries look at our business units and think they're more valuable, then we would always look at that. But the fact of the matter is, a lot of these business units are complementary. They don't take a lot of CapEx to run and provide tremendous amount of free cash flow. So I don't know if you wanted to add anything, Allen, but it's something that we just don't have any urgency around it.

Yes. No, I would agree with those comments, Rene. And I think over the last 15 months, we've really focused on areas where we had redundant equipment or areas where we had land that we weren't going to develop and divesting just excess assets. And so part of our discussion of our strategic plan, which we laid out in both our press release and MD&A is really, right now our focus is, let's provide great service to our customers. Let's continue to optimize. We're not quite done on the synergies. We won't be reporting on it anymore. It will be part of our optimization and improvement in our margins going forward, but there is more to do from an optimization standpoint. We do want to continue to grow our volumes across our network. There's lots of small things we can do to continue to add value, contract volumes into our infrastructure via small brownfield type tie-ins, and create more partnerships with our customers. We did close down a few facilities where we needed to be more efficient. And as we look forward, we don't need more redundant capital. We need more efficient capital and get that utilization rate up. I think I mentioned in my notes that our utilization right now is currently in that 65% to 70%. So we want to continue to increase that utilization across that network because that's the most value for our shareholders, and we're going to continue to do that. And as we get through 2023, as Rene mentioned, some of these smaller business units that aren't material, we'll take a look. And if there's opportunities to divest, then we'll execute.

Great. Allen, you mentioned the operational efficiencies and synergies. I know you're not going to speak to it, but would you be willing to provide any potential goal posts in terms of what the order of magnitude could be for future realizations?

Well, I think, Aaron, it just comes down to what will our ultimate free cash will be in 2023 and 2024. We set the target and we wanted to beat the target. Extremely pleased with our team on how they executed earlier than we wanted. And obviously, we are at $76 million that we reported, and we know that number's going to be higher. Chad did some great work on restructuring the balance sheet and saving some interest cost for us. So I won't provide a number to it, but there is more to go, and extremely pleased with how we're entering 2023 here with kind of all cylinders firing.

Perfect. Maybe I'll sneak in one other quick question. The $50 million growth capital, just wondering how much of that is currently committed or a placeholder. And if there's any chance, if industry activity is stronger than you think, that we could see spending over and above that $50 million figure in 2023.

Yes. Good question, Aaron. The $50 million, we're going to finish this year close to that $45 million target that we established. And again, we've talked about what type of investments we want to make. We want to tie into infrastructure and have it backed by committed contracts or recurring volumes. And when I think about 2023 and the $50 million, there is some projects that will be started here in Q4 and will carry over into 2023. And then there will be some projects that we're still working on that we know could come to fruition. So that $50 million does have part and parcel some components of it. But right now, our target's $50 million. Will more opportunities come to light throughout 2023? My guess would be yes. As activities pick up, there's always more opportunities. We just want to make sure they fit our investment strategy and it's something we want to execute on. But right now, it's $50 million.

[Operator Instructions] The next question comes from John Gibson of BMO Capital Markets.

Congrats on the strong quarter here. Just first, can you maybe talk about the volatility in commodity prices during the quarter and how much this impacted your midstream business with regards to marketing?

Well, I think -- we don't really -- we're certainly -- I would call our crude oil marketing is a very low risk. Not really -- it's not so much the WTI being volatile, but it's the differentials. And so what we're trying to do for not only Secure, but more importantly for our customers, is how do we get a better netback from them? And part of that is trying to get their condensate, light sweets, light sours and heavies in a stream that they can optimize and get a better netback. So as you saw in the quarter, it was more a case of lots of volatility around the differentials. So we don't really pay too much attention to betting on where WTI is going so much as really working very closely with the customer. And part of that is you have a lot of product on truck. Making sure it's cost effective to get them the -- that's why I call it the best netback, because sometimes putting the product in one stream, you don't get the best netback, and there's higher transportation to do something to go into another stream. So that's what our guys -- we have a dedicated team. They do nothing but that work with our customers every day to increase. And we share that with the customers, so it's a win-win.

Great. Just on the dividend, I'm wondering if you have a target payout ratio. I know you mentioned 39% of sort of your trailing 12-month free cash flow going towards the dividend, but I'm wondering if you could look to increase or decrease this level depending on your outlook.

John, we don't have a formal payout ratio at this point in time, but we look at it from coming out with this dividend that we wanted to make sure it was sustainable. And so we looked at the recurring nature of our revenues and cash flow and based it off a percentage of that. And I just want to make sure that as we move forward, that those assets would provide that platform to grow that dividend ratably over the next several years.

Okay. And then just last one for me just in terms of leverage. Once you get down to that $850 million to $900 million total debt level, could we expect more capital to shift towards capital returns? Or would you maybe target more growth projects once you get there?

Yes. Good question. I mean, that's our next target. And we see that as a relatively short-term target that we could see ourselves getting there by the end of 2023. We'll continue to assess the opportunities we have and look what is the best return for our shareholders. But I think what you'll see is it'll probably be a combination going forward of continuing to try to increase that dividend. We will still pursue capital opportunities, but we'll also always be mindful of where our outstanding debt is.

Thank you. There are no further questions at this time. Please continue.

All right. If there's no further questions, I want to thank you for being on the conference call today. The taped broadcast of the call will be available on Secure's website. Thank you again.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.